Mortgage Underwriting Principles 2 — Questions and Answers
Question 1: A borrower has a back-end DTI of 48% and is applying for a conventional loan. What is the most likely outcome?
- Automatic approval because income is sufficient
- Denial unless compensating factors exist (Correct answer)
- Approval with a higher interest rate only
- Approval if the front-end DTI is under 28%
Correct answer: Denial unless compensating factors exist
Conventional loans typically require a back-end DTI of 43-45%; 48% requires strong compensating factors or DU/LP approval.
Question 2: Which asset type is generally NOT acceptable as reserves for mortgage qualification purposes?
- 401(k) vested balance at 60%
- Checking account funds
- Borrowed funds from a personal loan (Correct answer)
- Proceeds from the sale of another property
Correct answer: Borrowed funds from a personal loan
Borrowed funds cannot be counted as reserves because they create an additional liability rather than representing owned assets.
Question 3: An underwriter is reviewing a self-employed borrower's income. Which document is the primary source for calculating qualifying income?
- Bank statements for the past 12 months
- A CPA letter confirming income
- Two years of federal tax returns (1040s) (Correct answer)
- The most recent year's W-2
Correct answer: Two years of federal tax returns (1040s)
Two years of federal tax returns are the standard requirement for self-employed borrowers to establish stable, ongoing income.
Question 4: What is the purpose of the 4506-C form in the underwriting process?
- To authorize a credit report pull
- To request tax transcripts directly from the IRS (Correct answer)
- To verify employment with the borrower's employer
- To document the property's appraised value
Correct answer: To request tax transcripts directly from the IRS
Form 4506-C authorizes lenders to obtain tax transcripts from the IRS to verify the income reported on a borrower's application.
Question 5: When calculating qualifying income for a salaried borrower with regular overtime, what documentation is typically required?
- Only the most recent pay stub
- Two-year history and evidence the overtime is likely to continue (Correct answer)
- Employer letter stating overtime is guaranteed
- Three months of bank statements showing deposits
Correct answer: Two-year history and evidence the overtime is likely to continue
Overtime income requires a two-year history and a reasonable expectation of continuance to be included in qualifying income.
Question 6: A property appraises for $290,000 but the purchase price is $310,000. The lender uses which value to calculate LTV?
- The purchase price of $310,000
- The average of both values ($300,000)
- The appraised value of $290,000 (Correct answer)
- The value selected by the borrower
Correct answer: The appraised value of $290,000
Lenders use the lesser of the purchase price or appraised value when calculating LTV for a purchase transaction.
Question 7: Which credit event has the longest standard waiting period before a borrower can qualify for a conventional conforming loan?
- Chapter 13 bankruptcy
- Foreclosure (Correct answer)
- Short sale with deficiency
- Chapter 7 bankruptcy
Correct answer: Foreclosure
A foreclosure on a conventional loan typically carries a 7-year waiting period, the longest of common derogatory events.
Mortgage Underwriting Principles 2
A borrower has a back-end DTI of 48% and is applying for a conventional loan.
What is the most likely outcome?